[Federal Register Volume 70, Number 38 (Monday, February 28, 2005)]
[Notices]
[Pages 9688-9690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-785]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51217; File No. SR-NYSE-2004-54]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Amendments to 
the NYSE Constitution and the Adoption of an Independence Policy of the 
NYSE Board of Directors

February 16, 2005.

I. Introduction

    On September 17, 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 to implement certain amendments to its 
Constitution. The proposed rule was published for comment in the 
Federal Register on January 14, 2005.\3\ The Commission received no 
comment letters on the proposed rule change. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51015 (January 11, 
2005), 70 FR 2688.
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II. Description of the Proposed Rule Change

    The Exchange has proposed amendments to its Constitution with 
respect to the new governance architecture that was approved by the 
Commission and implemented by the Exchange in December 2003.\4\ The 
Exchange also has proposed an Independence Policy for its Board of 
Directors (``Board''), which contains standards that NYSE directors 
must meet to be considered independent.
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    \4\ See Securities Exchange Act Release No. 48946 (December 17, 
2003), 68 FR 74678 (December 24, 2003).
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    The proposed changes to the NYSE Constitution are summarized below:
     The Board would have the flexibility to move up its annual 
meeting of members to make it closer to the end of the Exchange's 
fiscal year, which coincides with the calendar year, and also to give 
the Board more flexibility with respect to the timing necessary to 
report its director nominations to the Exchange's membership, but 
without reducing the current time period for members to propose 
nominations by petition.
     The Chief Executive Officer (``CEO'') would be recused 
from participating in any Board review of decisions made by Exchange 
staff, officers or committees.
     The CEO would be prohibited from requiring reviews of 
disciplinary decisions and would be recused from participating in Board 
reviews of any disciplinary decisions.
     In the event the Chairman of the Board is also not the 
CEO, the CEO would be permitted to serve as Chairman of the Board of 
Executives, to call meetings of the Board of Executives, and to 
determine when circumstances require shorter notice of meetings of the 
Board of Executives than otherwise provided for that group.
     Members of the Board of Executives would be barred from 
serving on the Hearing Board in light of their participation on the 
Regulation, Enforcement & Listing Standards Committee.
     The qualifications of the floor member representatives on 
the Board of Executives would be revised to include any individual, 
other than a specialist, who spends a substantial amount of time on the 
Exchange floor, in order to reflect the Exchange's entire non-
specialist floor member constituency as it currently exists.
     The current requirement that the Board and the Board of 
Executives have

[[Page 9689]]

two plenary sessions a year would be replaced by a requirement that 
each member of the Board attend at least three Board of Executives 
meetings annually and the Chairman would make an Annual Report on the 
Exchange's activities solely to the Board of Executives.
     A reference to ``Nominating Committee'' would be revised 
to reflect the change in name to ``Nominating & Governance Committee.''
     The Nominating & Governance Committee no longer would be 
required to conduct succession planning with respect to the Exchange's 
Chairman, because the Board now decides whether to separate the offices 
of Chairman and CEO and then selects the Chairman, if it determines to 
separate those offices.
     An erroneous reference to ``Article VII, Section I'' is 
corrected to refer to ``Article VIII, Section 1.''
    In addition to the changes to the NYSE Constitution, the Exchange 
also has proposed an Independence Policy for the Board. The 
Independence Policy would apply to all members of the Board and would 
require the Board to make an independence determination with respect to 
each director upon his or her nomination or appointment to the Board 
and thereafter as the Board considers advisable, but no less frequently 
than annually. A director would be independent only if the Board 
determined that the director has no material relationship with the 
Exchange. In making a determination of independence, the Board would 
have to consider the special responsibilities of a director in light of 
the status of the NYSE as a New York non-profit corporation, as a self-
regulatory organization, and as a national securities exchange subject 
to the Commission's supervision, as well as the specific independence 
qualification standards set forth in the proposed policy. The 
Independence Policy sets forth standards when a director would not be 
independent as a result of a relationship with the Exchange, Exchange 
members, member organizations, non-member broker-dealers, or listed 
companies. Each director would be responsible for informing the 
Exchange promptly of any relationships that might bear on the 
determination of his or her independence. Any director who is no longer 
independent as a result of the existence of a relationship that 
violates the independence standards in the NYSE Constitution, or whom 
the Board determines is no longer independence under the Independence 
Policy, would be deemed to have tendered his or her resignation. Under 
Article IV, Section 2 of the NYSE Constitution, the Board is required 
to adopt specific standards relating to the independence determination, 
which are to be comparable to standards required of issuers listed on 
the Exchange, by effecting a rule change within the meaning of Section 
19(b)(1) of the Act.

III. Discussion and Commission Findings

    After careful consideration, 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.\5\ In 
particular, the Commission finds that, the proposed rule change is 
consistent with Section 6(b)(1) of the Act \6\ which requires that the 
exchange be ``so organized and [have] the capacity to carry out the 
purposes of [the Act]'' and to ``enforce compliance by its members and 
persons associated with its members with the provisions of [the Act].'' 
The Commission also finds that, the proposed rule change is consistent 
with Section 6(b)(3) of the Act,\7\ which requires that the rules of a 
national securities exchange assure the fair representation of its 
members in the selection of its directors and administration of its 
affairs, and provide that one or more directors shall be representative 
of issuers and investors and not be associated with a member of the 
exchange, broker, or dealer. In addition, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act \8\ 
in that it is designed, among other things, to facilitate transactions 
in securities; 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 
a national market system; and in general, to protect investors and the 
public interest, and does not permit unfair discrimination among 
issuers. Further, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(7) of the Act,\9\ which, among other 
things, requires that the rules of a national securities exchange 
provide a fair procedure for the disciplining of members and persons 
associated with members.
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    \5\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(1).
    \7\ 15 U.S.C. 78f(b)(3).
    \8\ 15 U.S.C. 78s(b)(5).
    \9\ 15 U.S.C. 78s(b)(7).
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    The Commission notes that the proposed changes to the NYSE 
Constitution would prohibit the CEO from participating in any Board 
review of decisions by Exchange staff, officers or committees; from 
requiring reviews of disciplinary decisions; and from participating in 
reviews by the Board of disciplinary decisions. The Commission also 
notes that the proposed NYSE Constitution changes would allow the CEO 
to preside over meetings of the Board of Executives; to call meetings 
of the Board of Executives; and to determine when circumstances require 
shorter notice of meetings of the Board of Executives than otherwise 
provided. The Commission believes that these changes are designed, in a 
manner consistent with the Exchange's governance architecture, to 
clarify the role of the CEO and to bolster the separation of the 
business and regulatory functions of the Exchange. The Commission finds 
that these NYSE Constitution revisions are consistent with the Act. 
Further, the proposed rule change would eliminate the Chairman as a 
subject of mandated succession planning for the Nominating & Governance 
Committee. In the Commission's view, this change is appropriate in 
light of the Board's authority to decide whether the offices of 
Chairman and CEO should be separated.
    The Commission also notes that the proposed rule change would 
prohibit members of the Board of Executives from serving on the 
Exchange's Hearing Board in light of the fact that members of the Board 
of Executives currently serve on the Regulation, Enforcement & Listing 
Standards Committee, which has been delegated by the Board the 
responsibility to hear appeals of disciplinary matters considered by a 
Hearing Panel. The Commission notes that the Hearing Board would still 
consist of members and allied members of the Exchange who are not 
members of the Board or Board of Executives and registered employees 
and non-registered employees of members and member organizations. The 
Commission believes that prohibiting members of the Board of Executives 
from serving on the Hearing Board is consistent with the Act's 
requirements.
    The Commission notes that the proposed rule change seeks to make 
several changes to the NYSE Constitution that would affect the 
administration of the Exchange. These changes include allowing the 
Board to schedule the annual meeting of members closer to the end of 
the Exchange's fiscal year; giving the Board more flexibility on the 
timing of

[[Page 9690]]

submission of director nominations to the membership; and requiring 
Board members to attend at least three meetings of the Board of 
Executives annually instead of requiring two plenary sessions between 
the Board and the Board of Executives. While these changes are designed 
to provide the Board with greater flexibility in administering the 
affairs of the Exchange, particularly with respect to the annual 
meeting process, they require that the Board provide sufficient advance 
notice to members of the annual meeting to take into account the number 
of days for the filing of nomination petitions, the determination by 
the Board of petition candidates' eligibility, and notice to members of 
the annual meeting. In the Commission's view, these proposed changes 
are consistent with the Act. In addition, the Commission notes that the 
proposed rule change would allow the Board to appoint to the Board of 
Executives as a floor member representative any member, other than a 
specialist, who spends a substantial amount of time on the floor. 
Because this change is intended to reflect more accurately the entire 
constituency of floor members, other than specialists, who are eligible 
to serve on the Board of Executives, the Commission believes that this 
proposal is consistent with the Act.
    Finally, the Commission notes that the NYSE has submitted an 
Independence Policy pursuant to the requirement of Article IV, Section 
2 of the NYSE Constitution. This provision of the NYSE Constitution 
requires the Exchange to adopt standards for determining the 
independence of its directors, which are to be comparable to the 
standards required of the Exchange's listed issuers, and to file such 
standards with the Commission as a proposed rule change under Section 
19(b)(1) of the Act.\10\ The Commission believes that generally the 
NYSE's Independence Policy comports with the independence standards 
required of the Exchange's listed issuers, but the Exchange has 
tailored its policy to address its role as a self-regulatory 
organization and as a listed market.\11\ The Commission recently 
proposed governance standards for national securities exchanges and 
registered securities associations, which, among other things, would 
require that a majority of the directors of an exchange or association 
be independent.\12\ The SRO Governance Proposal also would set forth 
specific criteria for determining the independence of an exchange's or 
association's directors that are similar, but not identical, to the 
Exchange's Independence Policy. The Commission believes that, in the 
current context, the Exchange's proposed Independence Policy is 
consistent with the Act. The Commission notes, however, that the 
Exchange would have to conform its Independence Policy, as well as its 
Constitution and rules, to any rules the Commission may adopt with 
respect to the governance of exchanges and associations and the 
independence of their directors.
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    \10\ 15 U.S.C. 78s(b)(1).
    \11\ The independence standards for NYSE listed issuers are 
found in Section 303A.00 of the NYSE Listed Company Manual.
    \12\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004) (``SRO Governance Proposal'').
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NYSE-2004-54) is hereby 
approved.
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    \13\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-785 Filed 2-25-05; 8:45 am]
BILLING CODE 8010-01-P