NYSE, Nasdaq Propose Governance Changes

The New York Stock Exchange wants to overhaul its corporate governance and financial statement requirements to eliminate duplicate disclosures now required under the Securities and Exchange Commission’s rules.

The proposed changes would revise Section 303A of the Listed Company Manual, amend Section 203.01, and eliminate Sections 307.00 and 314.00. The NYSE says many of the current disclosure requirements duplicate SEC requirements resulting from changes to Item 407 of Regulation S-K made in August 2006, when the SEC adopted amendments to its executive compensation and related person disclosure rules. In some instances, the SEC rules require more detailed disclosures than Section 303A, the NYSE says.

According to a legal bulletin from the law firm Blank Rome (see box at right), the most significant change is the proposed elimination of disclosure requirements from Section 303A.02(a), which currently mandates disclosure of the names and company relationships of independent directors. Under the proposed changes, NYSE-listed companies would be excused from making the following disclosures:

disclosure of the names and company relationships of independent directors;

disclosure by controlled companies of the fact that they are taking advantage of any controlled company disclosure exemptions;

disclosure on the company Web site of an undertaking to provide paper copies of the company’s financial statements upon a shareholder’s request or press releases related to the company’s filing of its annual report, for both listed companies subject to the U.S. proxy rules and foreign private issuers that provide audited financial statements to shareholders in a manner consistent with the U.S. proxy rules;

proxy and Form 10-K disclosure statements regarding the online and print availability of each listed company’s audit, nominating, and compensation committee charters; code of business conduct; and ethics and corporate governance guidelines;

a compensation committee report on executive officer compensation; and

an audit committee report.

In addition, amendments to Section 303A.03 would clarify that each listed company must disclose a method for all interested parties to communicate concerns to directors of a listed company and that shareholders aren’t the only parties that must be made aware of methods to communicate concerns to directors.

Under proposed changes to Section 303A.00, listed companies would have the option to provide a number of required disclosures through their company Web sites as an alternative to making them through the annual proxy statement or Form 10-K. Section 303A.14, which explains the requirement to have and maintain a publicly accessible Web site, would be updated and moved to the new Section 307.00.

The NYSE also proposed amending the bright-line test that sets the dollar amount of direct compensation that makes a director lose independence, by increasing the threshold from $100,000 to $120,000 and amending the bright-line test that determines when the relationship of a director’s immediate family member with the company’s auditing firm makes that director lose independence. Under current rules, a director isn’t considered independent if he has an immediate family member who is a current employee of the auditing firm who works in the firm’s audit, assurance, or tax compliance practice, even if that family member didn’t personally work on the listed company’s audit. The proposed changes would disqualify a director from being considered independent only when he or she has an immediate family member who: (a) is a current partner of the auditing firm, (b) is a current employee of the auditing firm and personally works on the listed company’s audit, or (c) was, within the last three years, a partner or employee of such a firm and personally worked on the listed company’s audit within that time, the Blank Rome alert notes.

If adopted, the proposal would also eliminate current Sections 307.00 and 314.00 of the Listed Company Manual, which contain guidance regarding related-party transactions.

Comments are due 21 days after publication in the Federal Register.

NASDAQ Update: Change In Material News Submission

Nasdaq has changed its rules to require all of its listed companies deliver material news to Nasdaq MarketWatch electronically beginning Sept. 4.

Under a rule proposal adopted recently by the SEC, Nasdaq-listed companies will be required to submit any material news to Nasdaq MarketWatch using the electronic disclosure submission system, except in emergency situations.

Nasdaq rules require listed companies to make prompt disclosure to the public of any material information that could affect the value of their securities or influence investor decisions. The rules also require issuers to provide notice of certain disclosures to MarketWatch prior to release of the information. Currently issuers can provide material news notifications electronically, via fax or telephone.

While Nasdaq introduced the electronic disclosure submission system in 2004, most issuers still provide material news notifications by fax. More than 70 percent of 4,200 material news notifications sent in January 2007 were submitted by fax, the rule proposal noted. Nasdaq said the change would reduce the administrative burden of retyping the information from fax-delivered documents and telephone notifications manually into the MarketWatch database system.

Nasdaq defines emergency situations to include: lack of computer or Internet access; a technical problem on either the issuer or Nasdaq system, or an incompatibility between those systems; and a material development such that no draft disclosure document exists, but immediate notification to Nasdaq MarketWatch is important based on the event. In an emergency, an issuer would continue to be required to notify Nasdaq prior to disseminating material news, but Nasdaq would accept notification by telephone or fax.

Repeated failure by a Nasdaq-listed company to notify Nasdaq using the electronic disclosure submission system prior to the distribution of material disclosure to the public will result in a violation of Nasdaq’s listing requirements.

SRO Name Update: SIRA Out, FINRA In

Leaders of the new joint regulator formed by the pending merger of the NASD and the New York Stock Exchange Member Regulation have dumped the name initially chosen for the new entity, amid concerns that its acronym might be offensive to Muslims.

Schapiro

As Compliance Week reported June 26, the combined entity was to be called the Securities Industry Regulatory Authority, or SIRA. However, in a July 12 e-mail to firms, NASD chairman and chief executive Mary Schapiro noted that after the name was revealed, the group was made aware that use of the acronym “could create confusion, or might even be considered offensive by some,” because of its similarity to an Arabic term used to refer to the traditional biographies of Mohammed.

The organization will instead be known as the Financial Industry Regulatory Authority, or FINRA.