[Federal Register Volume 69, Number 216 (Tuesday, November 9, 2004)]
[Notices]
[Pages 65006-65011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3080]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50625; File No. SR-NYSE-2004-41]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change by the New York Stock Exchange, Inc. and Notice of 
Filing and Order Granting Accelerated Approval to Amendment Nos. 2 and 
3 Thereto To Amend Section 303A of the NYSE Listed Company Manual 
Relating to Corporate Governance

November 3, 2004.

I. Introduction

    On August 3, 2004, 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change (SR-NYSE-2004-41) to amend certain provisions of 
Section 303A of the NYSE

[[Page 65007]]

Listed Company Manual (``Listed Company Manual'') regarding corporate 
governance standards for companies listed on the Exchange. On August 
30, 2003, the NYSE submitted Amendment No. 1 to the proposal.\3\ The 
proposed rule change, as amended by Amendment No. 1, was published for 
comment in the Federal Register on September 8, 2004.\4\ The Commission 
received ten comment letters on the proposed rule change.\5\ On October 
28, 2004, the NYSE filed Amendment No. 2 to the proposed rule 
change.\6\ On November 2, 2004, the NYSE filed Amendment No. 3 to the 
proposed rule change.\7\ This order approves the proposed rule change, 
as amended by Amendment Nos. 1, 2, and 3. The Commission is granting 
accelerated approval of Amendment Nos. 2 and 3, and is soliciting 
comments from interested persons on those amendments.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated August 27, 2004 (``Amendment No. 1'').
    \4\ See Securities Exchange Act Release No. 50298 (August 31, 
2004), 69 FR 54328 (``Notice'').
    \5\ See Letters to Jonathan G. Katz, Secretary, Commission, 
from: Sarah A.B. Teslik, Executive Director, Council of 
Institutional Investors, dated September 15, 2004 (``CII letter''); 
Dale McCormick, Maine State Treasurer, dated September 17, 2004 
(``Maine Treasurer Letter''); Richard Curtis, Executive Director, 
Highway Patrol Retirement System, William Estabrook, Executive 
Director, Ohio Police and Fire Pension Fund, Laurie Hacking, 
Executive Director, Public Employees Retirement System of Ohio, 
Damon Asbury, Executive Director, State Teachers Retirement System 
of Ohio, James Winfree, Executive Director, School Employees 
Retirement System of Ohio, Keith Overly, Executive Director, Public 
Employees Deferred Compensation, dated September 21, 2004 (``Ohio 
Retirement System Letter''); Colin Melvin, Director-Corporate 
Governance, Hermes Investment Management Limited, dated September 
22, 2004 (``Hermes Letter''); Joseph M. Huber, Senior Corporate 
Counsel, Federated Investors, Inc., dated September 27, 2004 
(``Federated Letter''); Henry H. Hubble, Vice President, Investor 
Relations and Secretary, Exxon Mobil Corporation, dated September 
28, 2004 (``ExxonMobil Letter''); Steve Odland, Chairman, President 
and CEO, AutoZone, Inc., and Chairman, Corporate Governance Task 
Force, Business Roundtable, dated September 29, 2004 (``Business 
Roundtable Letter''); Kay R.H. Evans, Executive Director, Maine 
State Retirement System, dated September 29, 2004 (``Maine 
Retirement System Letter''); Michael J. Holliday, Chair of the 
Committee, Committee on Securities Regulation of the Business Law 
Section of the New York State Bar Association, dated September 29, 
2004 (``NYSBA Committee Letter''); and letter to William H. 
Donaldson, Chairman, Commission, from The Honorable Diana DeGette, 
The Honorable Edward Markey, and The Honorable Janice Schakowsky, 
Members of Congress, dated October 14, 2004 (``Representatives' 
Letter'').
    \6\ See letter from Mary Yeager, Assistant Corporate Secretary, 
NYSE, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated October 28, 2004, and accompanying 
Form 19b-4 (``Amendment No. 2''). In Amendment No. 2, the NYSE 
withdrew a proposed change to the Commentary to Section 
303A.02(b)(iii) that would have revised the definition of 
``immediate family member'' for purposes of the bright line test 
relating to a director's relationships with the listed company's 
auditor. See also Section IV. below.
    \7\ See letter from Mary Yeager, Assistant Corporate Secretary, 
NYSE, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated November 2, 2004 (``Amendment No. 
3''). In Amendment No. 3, the NYSE proposed to give listed companies 
until their first annual meeting after June 30, 2005 to replace a 
director who was independent under the NYSE's existing bright line 
test relating to relationships of a director or the director's 
immediate family member to the auditor of the company, but would not 
be under the revised rule. As originally proposed, the extension 
would have been granted until the first annual meeting after January 
1, 2005. Amendment No. 3 also proposes to include this provision in 
the text of Section 303A.
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II. Description of the Proposed Rule Change

    On November 4, 2003, the Commission approved Section 303A of the 
Listed Company Manual, which sets out the Exchange's corporate 
governance requirements applicable to listed companies.\8\ In the 
instant proposal, the Exchange proposes certain clarifying and 
substantive changes to Section 303A, described in detail below.\9\
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    \8\ See Securities Exchange Act Release No. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003) (SR-NYSE-2002-33).
    \9\ The proposed rule change also includes various technical and 
stylistic revisions to the language of Section 303A. See notice.
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Definition of Independent Director

    Section 303A.02 of the Listed Company Manual sets forth a 
definition of ``independent director'' for purposes of the Exchange's 
corporate governance standards for listed companies, which, among other 
things, includes a series of bright line tests that directors must 
satisfy in order to be eligible to be deemed independent for purposes 
of board and committee membership. Many of the proposed changes relate 
to these independence tests.
    As an initial matter, the Exchange proposes to amend Section 
303A.02(a) of the Listed Company Manual to clarify that companies are 
required to identify which of their directors have been deemed 
independent. The Exchange also proposes to amend Section 303A.02(b)(i) 
to add a definition of the term ``executive officer,'' and to amend 
other provisions throughout Section 303A by including use of this term.
    Additionally, the Exchange proposes to amend the Commentary to 
Sections 303A.02(b)(i) and (ii), which set forth bright line tests of 
independence for directors who are, or whose family members are, 
current or former employees or recipients of compensation from a listed 
company, to state that service as an interim executive officer (and not 
only an interim Chairman or CEO, as currently provided) will not 
trigger the look-back provisions in those sections.
    The Exchange further proposes to amend Section 303A.02(b) to 
reformulate the wording of the bright line independence tests to 
provide more clarity with respect to how the applicable look-back 
periods should be applied. In particular, with respect to Section 
303A.02(b)(ii), the Exchange proposes to amend the rule text to state 
that a director is not independent if the director ``has received or 
has an immediate family member who has received, during any twelve-
month period within the last three years, more than $100,000 in direct 
compensation from the listed company, other than 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).'' \10\
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    \10\ This language would replace the current rule text, which 
provides: ``A director who receives, or whose immediate family 
member receives, more than $100,000 per year in direct compensation 
from the listed company, other than 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), is not independent until three years after he or 
she ceases to receive more than $100,000 per year in such 
compensation.''
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    The NYSE is also proposing a change to Section 303A.02(b)(iii), the 
bright line test relating to relationships of a director or the 
director's immediate family member to the auditor of the company 
(``Director-Auditor Relationship Test''). Section 303A.02(b)(iii) 
currently provides that: ``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 is not 'independent' until three years 
after the end of the affiliation or the employment or auditing 
relationship.'' An ``immediate family member'' is defined currently for 
all the independence tests in Section 303A.02(b) 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 Exchange proposes to revise this standard to provide that a 
director is not independent if: ``(A) The director or an immediate 
family member is a current partner of a firm that is the company's

[[Page 65008]]

internal or external auditor; (B) the director is a current employee of 
such a firm; (C) the director has an immediate family member who is a 
current employee of such a firm and who participates in the firm's 
audit, assurance or tax compliance (but not tax planning) practice; or 
(D) the director or an immediate family member was within the last 
three years (but is no longer) a partner or employee of such a firm and 
personally worked on the listed company's audit within that time.''
    In the proposed rule change as published in the Notice, NYSE also 
proposed to revise the definition of ``immediate family member'' for 
purposes of the Director-Auditor Relationship Test. In Amendment No. 2, 
NYSE withdrew this proposed revision.\11\
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    \11\ See Amendment No. 2.
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    As amended by Amendment No. 3, the proposal would give listed 
companies until their first annual meeting after June 30, 2005 to 
replace a director who was independent under the NYSE's existing 
Director-Auditor Relationship Test, but would not be under the revised 
rule.\12\
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    \12\ As originally proposed, the extension would have been 
granted until the first annual meeting after January 1, 2005. See 
Amendment No. 3, which also proposes to include this provision in 
the text of Section 303A.
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    The Exchange proposes to revise the Commentary to Section 
303A.02(b)(v), the bright line test regarding, among other things, the 
independence of a director who held, or whose immediate family held, 
certain positions in a company that received payments from the listed 
company. The revised language would state that contributions made to 
tax exempt organizations shall not be considered ``payments'' under the 
test. The proposed change is meant to clarify that payments to a 
charitable organization related to a listed company's business 
relationship with that organization would be subject to the test.\13\
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    \13\ See notice.
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Requirements for Non-Management Directors

    The Exchange proposes to revise Section 303A.03(b) of the Listed 
Company Manual to clarify that a non-management director must preside 
over each executive session of the non-management directors, although 
the same director is not required to preside at all executive sessions 
of the non-management directors.\14\
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    \14\ See proposed rule text as published in notice for further 
proposed clarifications in this subsection.
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Requirements for Compensation Committees

    The Exchange proposes to revise Section 303A.05(b)(i)(B) of the 
Listed Company Manual to clarify, among other things, that the non-CEO 
compensation regarding which a compensation committee must make 
recommendations to its board is that of the executive officers. The 
Exchange also proposes to make clear that nothing in the aforementioned 
provision is intended to preclude the board from delegating its 
authority over the matters that this provision addresses to the 
compensation committee.

Duties of the Audit Committee

    The Exchange proposes to revise Section 303A.07(c)(iii)(B) of the 
Listed Company Manual to add that the audit committee of a listed 
company must meet to review the company's financial statements and must 
review the company's specific Management's Discussion and Analysis 
(``MD&A'') disclosures.

Disclosures of Guidelines and Codes and Methods of Communication

    The Exchange proposes to amend Sections 303A.03, .09 and .10 of the 
Listed Company Manual to specify that the relevant disclosures must be 
in the listed company's annual proxy statement (or, if the company does 
not file a proxy statement, then in the Form 10-K).

Foreign Private Issuer Disclosures

    The Exchange proposes to revise Section 303A.11 of the Listed 
Company Manual to clarify that foreign private issuers are required to 
provide disclosure of the significant ways in which their actual 
corporate governance practices (as opposed to their home country 
practices, as in the current version) differ from those required of 
domestic companies under Section 303A.

Certifications and Affirmations

    Section 303A.12 of the Listed Company Manual provides that each 
listed company CEO must certify to the NYSE each year that he or she is 
not aware of any violation by the company of the NYSE corporate 
governance listing standards. The Exchange proposes to amend this 
provision by adding the phrase ``qualifying the certification to the 
extent necessary.'' Any qualifications would need to be included in the 
disclosure of the certification required under the provision. The 
Exchange also proposes to add new Section 303A.12(c) to require that a 
listed company submit annual Written Affirmations to the NYSE, in a 
form specified by the Exchange, regarding details of compliance or non-
compliance with Section 303A, as well as interim Written Affirmations 
each time a change occurs to the board of any of the committees of the 
company that are subject to the provisions of Section 303A.
    The proposed rule change would also amend the General Application 
section of Section 303A to specify that listed open-end management 
investment companies (which can be listed as Investment Company Units, 
more commonly known as Exchange Traded Funds or ETFs), foreign private 
issuers, and preferred and debt listed companies (to the extent such 
companies must comply with Section 303A.06 of the Listed Company 
Manual) would be required to submit the annual and interim Written 
Affirmations.

III. Summary of Comments on the Proposed Rule Change

    The Commission received ten comment letters on the proposed rule 
change. Four comment letters generally supported the objective of the 
proposed amendments, or specifically the proposed changes to the 
Director-Auditor Relationship Test,\15\ although two of these 
commenters recommended revisions with respect to certain aspects of the 
proposal,\16\ while a third urged the Exchange to consider further 
input before finalizing the amendments.\17\ Six comment letters opposed 
the proposal, most specifically with respect to the Director-Auditor 
Relationship Test.\18\ The following is a summary of comments set forth 
by topic:
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    \15\ See Business Roundtable Letter, ExxonMobil Letter, 
Federated Letter, NYSBA Committee Letter.
    \16\ See Business Roundtable Letter, NYSBA Committee Letter.
    \17\ See ExxonMobil Letter.
    \18\ See CII Letter, Hermes Letter, Ohio Retirement Systems 
Letter, Maine Retirement Systems Letter, Maine Treasurer Letter.
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A. Proposed Changes to Director-Auditor Relationship Test

    Four comment letters supported the proposed changes to the 
Director-Auditor Relationship Test.\19\ One commenter, for example, 
believed that the amendments are appropriate because ``they focus on 
those relationships that have the potential to impact a director's 
independence.'' \20\ Two commenters expressed the view

[[Page 65009]]

that the changes, or aspects of them, would harmonize the NYSE's 
standards more closely with those of other markets.\21\
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    \19\ See Business Roundtable Letter, ExxonMobil Letter, 
Federated Letter, NYSBA Committee Letter. Some of the comments 
related to the proposed revision to the definition of ``immediate 
family member,'' which NYSE has withdrawn. See supra note 6.
    \20\ See Business Roundtable Letter.
    \21\ See Federated Letter, Business Roundtable Letter. One 
commenter added that the enumeration of specific relationships in 
the text of the standard would provide clarity to listed companies 
in applying the standard. Business Roundtable Letter.
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    One commenter favoring the changes stated that ``[b]ecause the 
current standard is so broadly drafted, it reaches a wide range of 
individuals, including individuals who never served on the listed 
company's audit.'' \22\ The commenter noted that deeming a director as 
not independent based on this standard results in the loss of the 
director's ability to serve on the three key board committees, and 
added that the pool of accounting firms with the necessary expertise 
and resources to audit the financial statements of large, multinational 
companies is limited, and listed companies have limited options when 
selecting an auditor.
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    \22\ See Business Roundtable Letter.
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    Commenters supporting the proposed changes believed that the 
amended standard would still reach those family member relationships 
that are the most likely to impact a director's independence,\23\ and 
that the greater coverage of the current standard does not reach any 
relationship that is likely to meaningfully affect independence.\24\ 
One commenter argued that ``it seems strange that the current standard 
could deem directors not independent even though the auditor with a 
similar relationship to the company was deemed independent under the 
test applicable to it relative to the company.'' \25\
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    \23\ Id.
    \24\ See NYSBA Committee Letter.
    \25\ Id.
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    Six comment letters, in contrast, opposed the proposed changes to 
the Director-Auditor Relationship Test,\26\ believing it would weaken 
corporate governance standards and investor protections \27\ and erode 
investor confidence.\28\ These commenters believed, for example, that 
the changes would allow a director to qualify as independent 
notwithstanding ``close relationships and/or employment ties'' \29\ and 
``obvious conflicts.'' \30\
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    \26\ See CII Letter, Hermes Letter, Ohio Retirement Systems 
Letter, Maine Retirement Systems Letter, Maine Treasurer Letter; 
Representatives' Letter. Some of the comments related to the 
proposed revision to the definition of ``immediate family member,'' 
which NYSE has withdrawn. See supra note 6.
    \27\ See CII Letter, Maine Treasurer Letter, Ohio Retirement 
Systems Letter, Representatives' Letter.
    \28\ See CII Letter, Hermes Letter, Ohio Retirement Systems 
Letter.
    \29\ See Maine Retirement Letter.
    \30\ See Maine Treasurer Letter.
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    In the view of some commenters, the proposed changes not only do 
not advance the goal of reducing corporate wrongdoing, ``but could 
actually precipitate more malfeasance by opening the door to conflicts 
of interest, which could ultimately compromise a director's ability to 
protect the interest of shareholders.'' \31\
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    \31\ See Representatives' Letter.
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    Specifically with regard to the proposed change to the look-back 
requirement of the test, which would make it applicable only to former 
partners and employees of an auditing firm who worked on the audit, 
some commenters believed that the change would only invite more 
conflicts of interest.\32\ Commenters opposing the proposal further 
believed that justifying it as necessary in order to make NYSE's rules 
consistent with those of The Nasdaq Market (``Nasdaq'') and the 
American Stock Exchange (``Amex'') was not appropriate,\33\ and that 
NYSE should be enforcing the toughest standards rather than matching 
weaker ones.\34\
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    \32\ See Representatives' Letter.
    \33\ See Ohio Retirement Systems Letter.
    \34\ See CII Letter. See also Representatives' Letter.
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    With regard to the proposed change in the definition of ``immediate 
family member'' for this test--subsequently withdrawn \35\--commenters 
noted that, under the proposal, a director would not be disqualified if 
his or her parent, child, sibling, mother- or father-in-law, son- or 
daughter-in-law, or brother- or sister-in-law, was, for example, a 
partner in the listed company's auditing firm.\36\ Some commenters 
expressed concern that the change ``would only work toward making 
directors less-independently minded, not more so.'' \37\ These and 
other commenters believed that the proposed change would diverge 
significantly from other exchanges' standards.\38\
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    \35\ See supra note 6.
    \36\ See CII Letter, Maine Treasurer Letter, Ohio Retirement 
Systems Letter.
    \37\ See Representatives' Letter.
    \38\ Id. See also CII Letter, Ohio Retirement Systems Letter.
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    ``The audit process is sacrosanct and should be above suspicion,'' 
stated one commenter generally.\39\ ``Any analysis,'' stated another, 
``should focus on whether directors or their relatives (broadly 
defined) have or have had an employment connection to the audit firm--
regardless of their title or specific role at the firm.'' \40\
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    \39\ See Hermes Letter.
    \40\ See CII Letter.
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    Some commenters also questioned why the NYSE is proposing to amend 
listing standards adopted less than a year ago after substantial 
discussion,\41\ and believed that the current standards ``have not been 
in place long enough to be declared unworkable.'' \42\
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    \41\ See CII Letter, Maine Treasurer Letter.
    \42\ See Maine Retirement Systems Letter.
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B. Proposed Amendment Concerning Look-Back Period for Compensation Test

    One commenter expressed concern regarding the proposed change to 
clarify that the look-back prohibition on an independent director 
receiving more than $100,000 in compensation from the listed company 
per year applies to any twelve-month period within the last three 
years.\43\ This commenter believed that a ``rolling 12-months'' test 
would entail an amount of work and burden of research for listed 
companies that is unwarranted for any incremental benefit it might 
provide. The commenter recommended that the test instead refer to 
payments in any of the last three fiscal years, following the format in 
the NYSE's test of independence with respect to payments made by or 
received from a company where a director is an employee, as well as in 
Commission rules for similar disclosure of transactions with directors 
and officers.
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    \43\ See NYSBA Committee Letter.
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C. Proposed Amendment Concerning Audit Committee Responsibilities

    One commenter addressed the proposed changes to the rules regarding 
audit committee responsibilities.\44\ The commenter believed that the 
provision as proposed to be amended could be read to suggest that the 
audit committee should have greater involvement in reviewing MD&A 
disclosures relative to earnings releases. The commenter stated that 
this suggestion does not accurately reflect the current practices of 
audit committees, many of which, consistent with emerging best 
practices, review individual earnings releases prior to publication.
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    \44\ See Business Roundtable Letter.
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    Additionally, the commenter maintained that the meaning of the 
proposal to require review of ``specific'' disclosures under MD&A is 
unclear. The commenter believed the proposed amendments should be 
accordingly modified.

[[Page 65010]]

D. Additional Comments

    One commenter recommended additional changes to clarify other 
aspects of the proposal.\45\ Some commenters believed that the new 
definition of ``immediate family member'' that NYSE had proposed for 
the Director-Auditor Relationship Test should be used uniformly for all 
the director independence tests in Section 303A.\46\ In addition, some 
commenters took the opportunity to suggest other changes, or raise 
concerns with respect to other aspects of the NYSE's corporate 
governance listing standards, that are beyond the scope of the instant 
proposal. Finally, one commenter believed there was need for more 
general comment on the standards, and urged the Exchange to consider a 
broad range of input before finalizing the proposed amendments.\47\
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    \45\ See NYSBA Committee Letter. The commenter included 
suggestions to: add language to subsection Section 303A.02(b)(v) to 
clarify the treatment of payments for property or services from or 
to tax-exempt organizations in ordinary course commercial 
transactions; revise the Commentary of that subsection, in 
consonance with the proposed change to the text of the rule, to 
refer to ``each of the last three fiscal years'' rather than the 
``last completed fiscal year,'' so as to avoid confusion; and revise 
the proposed changes to the text of Section 303A.05(b)(i)(B) to 
clarify the extent to which determinations of non-CEO compensation 
may be delegated by a company's board to its compensation committee. 
The commenter also urged that, for the sake of clarity, NYSE use a 
different phrase to define family member for purposes of the 
Director-Auditor Relationship Test.
    \46\ See ExxonMobil Letter, NYSBA Committee Letter.
    \47\ See ExxonMobil Letter.
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IV. Amendment Nos. 2 and 3 to the Proposed Rule Change

    In Amendment No. 2, the NYSE withdrew the proposed revision to the 
definition of ``immediate family member'' for purposes of the Director-
Auditor Relationship Test, and addressed comments received concerning 
the proposed rule change.
    With respect to the comments relating to the Director-Auditor 
Relationship Test, the Exchange referred to its statement in its 
original proposal noting that a number of NYSE listed companies are 
finding directors precluded from independence because of past personal 
or family member affiliation with an auditing firm, even though the 
person involved never worked on the listed company account. The 
Exchange stated that during the 2004 proxy season, it was contacted by 
a number of listed companies that noted what it believes is the 
problematic nature of the broad application of the current test, and 
provided examples of cases that arose in which directors were precluded 
from being deemed independent under the current Director-Auditor 
Relationship Test due to what the Exchange regards as its unintended 
broadness.
    The NYSE stated that, in considering alternative approaches with 
respect to immediate family members, it noted that the Nasdaq and Amex 
listing standards are more targeted than the current NYSE standard, 
implicating, for example, only former partners or employees of the 
audit firm who worked on the company's audit. The NYSE stated that 
because the Nasdaq and Amex outside auditor bright line tests were 
subject to Commission review and public comment, the Exchange felt that 
adapting its bright line test to reflect their approach would be an 
appropriate and non-controversial change.
    In response to a comment that the three-year look-back should apply 
to all former auditing partners and employees, as it does under the 
NYSE's current standard, and that a change to this standard would be 
``only inviting more conflicts of interest into the corporate 
boardrooms,'' \48\ the Exchange responded that, ``in fact, our proposal 
to cover all partners of the audit firm is a strengthening of its 
current standard, which only applies to partners or former partners who 
participate in the audit firm's audit, assurance or tax compliance (but 
not tax planning) practice.'' With respect the proposed revision to the 
``immediate family member'' definition applicable to the Director-
Auditor Relationship Test, NYSE noted comments supporting and opposing 
the proposal, and stated that, based on comments from the Commission 
staff and the public, it had determined to withdraw this specific 
amendment at this time.
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    \48\ See Representatives' Letter.
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    Finally, the NYSE discussed comments on the additional proposed 
changes to Sections 303A.02(b)(ii), 303A.02(b)(v), 303A.05(b)(i)(B), 
303A.07, 303A.08 and 303A.12. With regard to these comments, the NYSE 
stated that it will consider these suggestions as part of its ongoing 
review of Section 303A, but does not feel that additional 
clarifications or amendments to these sections are appropriate at this 
time.
    In Amendment No. 3, NYSE revised the proposed applicability date of 
the amended Director-Auditor Relationship Test for certain listed 
companies, and included a proposed reference to this date in the text 
of Section 303A. NYSE stated: ``Due to this proposed tightening of the 
independence test and to avoid a sudden change to the status of a 
current director, companies will have until their first annual meeting 
after June 30, 2005, to replace a director who was independent under 
the prior test but who is not independent under the current test.''

V. Discussion

    After careful consideration of the proposal and the comments 
received, the Commission finds that the proposed rule change, as 
amended, is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange,\49\ and, in particular, with the requirements of Section 6(b) 
of the Act.\50\ Specifically, the Commission finds that the proposal is 
consistent with Section 6(b)(5) \51\ of the Act, which requires that 
the rules of a national securities exchange, among other things, be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to, and perfect the mechanism of a free and open market and, in 
general, to protect investors and the public interest.
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    \49\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \50\ 15 U.S.C. 78f.
    \51\ 15 U.S.C. 78f(b)(5).
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    In the Commission's view, the proposed rule change provides 
appropriate clarification, and, in some cases, enhancement, of several 
of the corporate governance listing standards contained in Section 303A 
of the Listed Company Manual. For example, the proposed rule change 
clarifies that listed companies must identify which of their directors 
have been deemed independent; sets forth a definition of executive 
officer as used in these rules; rewords the look-back test regarding 
compensation received by a director or immediate family member in a 
manner that makes it easier to understand and apply; and specifies that 
only contributions to a tax-exempt organization are not to be 
considered ``payments'' for purposes of Section 303A.02(b)(v), but not 
payments to such organization made in the context of a business 
relationship.
    The proposal further requires audit committees to meet to review 
and discuss their companies' financial statements and to review their 
companies' specific MD&A disclosures; clarifies the responsibilities of 
compensation committees with respect to non-CEO compensation; requires 
more meaningful disclosure by foreign private issuers regarding how 
their practices differ from the practices required of domestic 
companies;

[[Page 65011]]

clarifies various disclosure requirements generally; and provides for 
the inclusion and disclosure of any qualifications to the 
certifications that CEOs submit to the NYSE. The addition of a 
provision requiring Written Affirmations from listed companies of their 
ongoing compliance with these standards should help assure that 
companies are meeting the requirements.
    With respect to Section 303A.02(b)(iii), the Director-Auditor 
Relationship Test, the Commission notes that the proposed rule change, 
as amended, clarifies and tightens NYSE's standard of independence with 
respect to current relationships of a director or immediate family 
member with the listed company auditor, while more closely aligning the 
look-back provision of the test with similar provisions adopted by Amex 
and Nasdaq, which, unlike NYSE's current standard, apply a look-back 
test only to former partners or employees of the audit firm who 
personally worked on the audit.
    For example, under the current NYSE standard, an immediate family 
member of a director who is ``affiliated with or employed in a 
professional capacity by'' the company's internal or external auditor 
would preclude the director from independence. As interpreted by the 
NYSE, under the current standard an immediate family member who is a 
current partner, but does not act in a ``professional capacity'' at the 
audit firm, would not impact the director's independence. Under the 
proposed revision, however, a director would not be considered 
independent if any of the director's immediate family members is a 
current partner of the audit firm. With respect to family members of a 
director who are current employees of the auditor, the proposed rule 
change clarifies, in consonance with NYSE's response to Frequently 
Asked Questions regarding its current rule, that the director is 
precluded from independence only if the family member employee 
participates in the firm's audit, assurance, or tax compliance (but not 
tax planning) practice.
    With respect to the look-back provision of the test, NYSE's current 
standard precludes a director from being considered independent if the 
director was affiliated with or employed by the auditor, or the 
director's immediate family member was affiliated with or employed in a 
professional capacity by the auditor, until three years after the end 
of the affiliation or relationship. NYSE is proposing to revise this 
provision so that the director is precluded from independence only when 
the director or his or her immediate family member was a partner or 
employee of the audit firm and personally worked on the listed 
company's audit within the three-year look back period. As noted by the 
NYSE, the Commission has previously approved analogous look-back 
provisions in the director-auditor relationship tests of other markets 
as consistent with the Act. The Commission further believes that 
approval of the proposed change in the NYSE standard is in accord with 
principles of fair competition and equal regulation of markets.
    The Commission finds good cause for approving Amendment Nos. 2 and 
3 before the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. The only revision to the 
original proposal made by Amendment No. 2 was the withdrawal of a 
proposed change to the definition of ``immediate family member'' for 
purposes of the Director-Auditor Relationship Test. The amendment 
proposes no new changes to the corporate governance standards for 
listed companies and raises no new regulatory issues. In Amendment No. 
3, the NYSE proposed to give listed companies until their first annual 
meeting after June 30, 2005, rather than their first meeting after 
January 1, 2005, as set forth in the original proposal, to replace a 
director who was independent under the current test but who would not 
be independent under the revised test. The amendment also would include 
this extension in the text of Section 303A. The Commission believes 
this extension of time for listed companies that based decisions on the 
current test of independence is reasonable, and acceleration of the 
amendment should help facilitate planning by listed companies.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment Nos. 2 
and 3 are consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2004-41 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NYSE-2004-41. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NYSE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSE-2004-41 and should be submitted on or before November 30, 2004.

VII. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\52\ that the proposed rule change (SR-NYSE-2004-41), as amended, 
be, and hereby is, approved and Amendment Nos. 2 and 3 are approved on 
an accelerated basis.
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    \52\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation, pursuant to 
delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E4-3080 Filed 11-8-04; 8:45 am]
BILLING CODE 8010-01-P