NYSE Redefines Independence Standards For Corporate Directors

The New York Stock Exchange has proposed a second round of changes to the definition of "immediate family member" in the corporate governance rules of its Listed Company Manual.

The NYSE originally proposed changes to its governance rules back in early August, and the latest amendment reflects consideration of comments from the public and the Securities and Exchange Commission.

Specifically, the new version withdraws changes that would have altered the definition of "immediate family member" for use in the context of the bright line independence test relating to a listed company’s audit firm.

Bright Line

The amendment would "reformulate" the wording of the bright line independence tests, with the goal of more accurately reflect how the applicable look-back periods should be applied. According to the NYSE, the new language is "considerably easier to read and understand."

The latest amendment notes that one of the most "significant language difficulties" was related to a section that precluded independence where a director or family member receives more than $100,000 in direct compensation. The wording suggested that—under certain circumstances—the look-back period might be as long as four years. The revised formulation makes it clear that the period should not be read to be longer than 36 months.

The amendment would also change a section that precludes independence where a director or family member is employed by—or affiliated with—a present or former internal or external auditor.

According to the NYSE, several companies commented that their directors were not being considered independent because of past personal or family member affiliation with an auditing firm, even though the person involved never worked on the listed company account.

“Because the current standard is so broadly drafted," wrote The Business Roundtable in a comment letter, "it reaches a wide variety of individuals who never worked on the listed company’s audit.

In one example, a company director lost independent status because a daughter was a junior accountant in a Swedish affiliate of the company’s independent auditor. "Because the daughter was in the audit function at the firm," the NYSE noted in its proposal, "the director was covered by our bright-line test even though the daughter is in an overseas office of the auditor and had never participated in any way on the listed company’s audit."

In another example, a director's daughter worked as an auditor in the London office of Arthur Anderson, which had been taken over by Deloitte. Though the daughter was at the firm for less than two years and did no work for the company involved, the director was precluded from being deemed independent because of the look-back period—his company is audited by Deloitte.

As a result, the NYSE amendment would revise its standard to be more in line with the more narrow Nasdaq and AMEX standards. The bright line standard would cover:

Any director or immediate family member who is a current partner of the audit firm;

Any director who is a current employee of the audit firm;

Any immediate family member who is a current employee of the audit firm participating in the firm’s audit, assurance or tax compliance (but not tax planning) practice; and

Any former partner or employee of the audit firm who personally worked on the listed company’s audit during the past three years.

The NYSE is giving companies until their first annual meeting after Jan. 1, 2005, to replace a director who was not independent under the revised rule.

A downloadable version of the proposed amendment, as well as related resources and coverage, is available from the box above, right.

NOTE: Please note that this is a summary of a proposed NYSE rule, and should not be construed to be a complete or final rule, nor should it be construed to be legal guidance. Please refer to the NYSE's Web site for updated and final rule information.