BUSINESS DEPARTMENT E-NEWS ALERT — NOVEMBER 22, 2002
New NYSE and NASD Rules Regarding
Standards for Listed Companies
On November 4, 2003, the Securities and Exchange Commission (“Commission”) approved new rules proposed
by the New York Stock Exchange, Inc. (the “NYSE”) and the The Nasdaq Stock Market, Inc. (“Nasdaq”)
intended to strengthen the corporate governance standards and ensure director independence for listed
companies. These new corporate governance listing standards supplement the corporate governance reforms
already adopted by the Commission pursuant to the Sarbanes-Oxley Act of 2002.
Originally filed in 2002, these proposed reforms were in response to a request from the Commission that the
exchanges review the listing standards, focusing specifically on corporate governance standards. The NYSE
and the National Association of Securities Dealers, through its subsidiary, Nasdaq, filed amendments to their
proposed standards in response to the Commission’s adoption of Rule 10A-3 pursuant to the Sarbanes-Oxley
Act of 2002 and to harmonize the proposed NYSE and Nasdaq listing rules.1 The NYSE rules are codified in
Section 303A of the NYSE’s Listed Company Manual. The Nasdaq rules amend Nasdaq Marketplace Rules
4200 and 4350.
COMPLIANCE DATES
Companies currently listed on the NYSE or Nasdaq exchanges are required to comply with the new rules upon
the earlier of the first annual meeting after January 15, 2004 or October 31, 2004. Classified or “staggered”
boards may have additional time to comply. If it would be necessary to change a classified board member who
is not scheduled for election at the first annual meeting, then that election can be postponed until the second
annual meeting, but in no event later than December 31, 2005. The exception for classified boards does not
apply to the adopted audit committee requirements. Private foreign issuers and Nasdaq small business issuers
must comply with any audit committee requirements (as set forth in Rule 10A-3 of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”)) by July 31, 2005.
Companies listing on the NYSE or Nasdaq exchanges in conjunction with their initial public offering are required
to have committees with at least one independent member at the time of listing, a majority of independent
members within 90 days of listing and a fully independent audit, compensation and nominating committees
within one year of listing. Additionally, newly listed companies must have a board made up of a majority of
independent directors within one year of listing.
Companies listing on the NYSE or Nasdaq upon transfer from another exchange are required to comply with the
listing rules within one year of the date of transfer for requirements not imposed by the previous exchange. A
transferring company will be deemed in compliance if it adopts the new standards within any transition or grace
period provided by the rules of the other market.
Additionally, Nasdaq provides for cure periods for non-compliance with its rules regarding independent directors
and audit committees when a member ceases to be independent for reasons reasonably out of the member’s
control or due to one vacancy in the committee. In such circumstances, the listing company has until the earlier
of the next annual shareholders meeting or one year from the date of non-compliance to be in compliance. The
On October 27, 2003 the American Stock Exchange filed proposed amended rules for enhanced corporate governance with the
Commissions (SR-Amex-2003-65). These rules have not yet been approved.
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listing company must provide Nasdaq with immediate notification of non-compliance. Finally, Nasdaq allows for
limited appointments of non-independent directors to the compensation, nomination and audit committees and
under exceptional and limited circumstances.
EXEMPT ORGANIZATIONS
The new rules generally apply to all domestic corporations listed on either the NYSE or Nasdaq.
Foreign Private Issuers
The NYSE allows foreign private issuers to follow home country practices except for audit committee
requirements in lieu of the new requirements except that they are required to have an audit committee that
satisfies the requirements of Rule 10A-3 of the Exchange Act, notify the NYSE in writing after any executive
officer becomes aware of any non-compliance with any applicable provision of the new rules, and to provide a
summary of the significant ways in which its governance differs from those followed by domestic companies
under the NYSE listing standards (either on their website or in their annual report). Nasdaq may grant
exemptions to foreign private issuers for acts that are contrary to the laws, rules or regulations of their home
country or are contrary to the generally accepted business practices of their home country. However, Nasdaq
will not grant exemptions to foreign private issuers that are contrary to U.S. federal securities laws, including the
recently adopted Rule 10A-3.
Controlled Companies
Companies of which more than 50% of the voting power is held by an individual, group or other company
(“Controlled Companies”) are exempt from the NYSE and Nasdaq’s rules regarding independent directors,
corporate governance and compensation committees. A Controlled Company seeking to take advantage of
such exemptions must disclose that choice in their annual proxy statement (or if not filed with the Commission,
in its Form 10-K).
Limited Partnerships and Bankrupt Companies
The NYSE exempts limited partnerships and companies in bankruptcy proceedings from the rules regarding
independent directors, corporate governance and compensation committees.
Registered Management Investment Companies
Because of the pervasive federal regulations applicable to registered management investment companies, the
NYSE and Nasdaq exempt these companies, with a few exceptions. The NYSE requires registered closed-end
management investment companies to have an audit committee composed of a minimum of three persons, to
comply with listing company audit committee provisions (except for the disclosure of simultaneous service on
multiple committees) and to comply with listing company certification and notification procedures. Nasdaq
exempts management investment companies (including business development companies) from the
requirements regarding board and key committee independence and codes of conduct.
Passive Business and Other Organizations
The NYSE and Nasdaq generally exempt passive business organizations, except to the extent that Rule 10A-3
applies. The NYSE also generally exempts derivatives and special purpose securities and companies listing
only preferred or debt securities. Finally, Nasdaq generally exempts cooperative entities that do not have a
publicly traded class of common stock.
The final rules regarding corporate governance listing standards are as follows:
• partners or family members of partners of external
auditors or persons or family members of persons
employed by the listed company’s external auditors who
worked on the listed company’s audit
2
3
Independent directors are those that have no material relationship with the company, either directly with the company, or as a partner, shareholder or officer of an organization
that has a relationship with the company.
3 Independent directors are those that are not employees of the company or its subsidiaries and have no relationship with the company that would interfere with the exercise of
independent judgment.
4 Independence can be obtained if the prohibited relationship has been terminated for more than three years. For the NYSE, this look-back is to be phased in one year after the
Commission approves the proposed rule change.
5 In the case of an investment company, a director is not independent if he or she is an “interested person” of the listed company (as defined in Section 2(a)(19) of the Investment
Company Act of 1940) other than in his or her capacity as a member of the board of directors or one of its committees
• persons or their immediate family members who are
employed by another company where any of the
• persons or their immediate family members affiliated
with or employed in a professional capacity by a present
or former internal or external auditor of the listed company
• persons or family members of persons who receive more
than $60,000 per year in direct payments from the issuer
(or a subsidiary or parent company of the listed company)
other than certain permitted payments
• employees or family members of an executive officer (of
the listed company or a subsidiary or parent of the listed
company)
• employees or immediate family members of executive
officers of the listed company
• persons or their immediate family members who receive
more than $100,000 per year in direct compensation from
the listed company
The following persons are not deemed to be independent:5
• The listed company is required to disclose those
directors that it has determined to be independent in its
annual proxy statement (or if it does not file a proxy, in its
Form 10-K or 20-F)
• The listed company is required to disclose the basis for
determination of director independence in its annual proxy
statement (or if it does not file a proxy, in its Form 10-K
annual report)
The following persons are not deemed to be independent:
• The Board of Directors of a Nasdaq listed company is
required to consist of a majority of independent3 directors
• The Board of Directors of a NYSE listed company is
required to consist of a majority of independent2 directors
Director Independence
Stricter Definition of
Independence4
Nasdaq
NYSE
Requirement
Separate Meetings for Board
Members
Requirement
4
• “Non-management directors” are all those who are not
company officers and includes such directors who are not
independent by virtue of a material relationship, former
status or family membership, of for any other reason
• Listed companies are to disclose a method for
interested parties to communicate directly with the
presiding director of such executive sessions or with nonmanagement directors as a group
• Non-management directors are required to meet at
regularly scheduled sessions without management
• Immediate family member includes 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 share such
person’s home
• executive officers or employees or their immediate
family members who are employed by of a company that
makes payments to, or receives payments from the listed
company for property or services in an amount exceeding
the greater of $1 million or 2% of such company’s
consolidated gross revenues in any fiscal year
worked on the listed company’s audit
executive officers of the listed company serve on that
company’s compensation committee
• Independent directors are required to meet at regularly
scheduled meetings at which only independent directors
are present
• A director who is or has a family member who is an
executive officer of a charitable organization, if the
company makes payment to the charity in excess of the
greater of 5% of the charity’s revenues or $200,000
• persons or family members who are partners, controlling
shareholders or executive officers of an entity which the
listed company made or from which it received payments
for property or services in an amount exceeding $200,000
or 5% of the entity’s consolidated gross revenues per year
• persons or their family members employed as executive
officers of another entity where any of the executive
officers of the listed company serve on that entity’s
compensation committee
Nasdaq
NYSE
Audit Committee
Compensation Committee
• One member is required to be a financial expert
• Each listed company must certify that the committee has
• One member is required to be a financial expert
• If a committee member serves on more than three
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• The committee is required to have a minimum three
person committee composed entirely of independent and
financially literate directors who have not participated in the
preparation of financial statements of the listed company or
any of its subsidiaries
• The compensation of the CEO of a listed company is to
be determined or recommended to the board for
determination either by a majority of independent directors
or by a compensation committee comprised solely of
independent directors
(The form of certification a listed company will be required
to submit to Nasdaq is in the process of being prepared
and should be available in January 2004)
• The committee is required to have a minimum three
person committee composed entirely of independent and
financially literate directors (or that must become
financially literate within a reasonable period of time after
appointment to the committee)
• The committee is required to produce a report on
executive compensation to be included in the listed
company’s annual proxy statement or annual report
• The committee must have a written charter that
addresses annual performance evaluations of the
committee
• The committee must be composed entirely of
independent directors
• The committee must identify individuals qualified to
become board members, consistent with criteria approved
by the board
• Each listed company is required to certify that it has
adopted a charter or resolution addressing the nomination
process
• Director nominees are required to be selected or
recommended for the board’s selection either by a majority
of independent directors or a committee composed entirely
of independent directors
• The committee must be composed entirely of
independent directors
Nominating/Corporate
Governance Committee
• The committee must have a written charter that
addresses annual performance evaluations of the
committee
Nasdaq
NYSE
Requirement
Code of Business Conduct and
Ethics
6
• Each listed company is required to adopt and disclose a
code of business conduct and ethics for directors, officers
and employees
• Each listed company is required to adopt and disclose a
code of business conduct and ethics for directors, officers
and employees
N/A
• Each listed company is required to adopt and disclose
corporate governance guidelines (including 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)
Corporate Governance
Guidelines
• Corporate governance guidelines and committee
charters must be included on the listed company’s
website
N/A
• Each listed company is required to have an
internal audit function
• The committee must have a charter (which includes
committee duties and responsibilities) and addresses
annual performance evaluations
a charter (which includes committee responsibilities and
authority) and has reviewed and reassessed the adequacy
of the charter on an annual basis
public company audit committees, and the listed company
does not limit the number of audit committees upon which
they can serve, the 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 the
determination)
(The form of certification a listed company will be required
to submit to Nasdaq is in the process of being prepared
and should be available in January 2004)
Nasdaq
NYSE
Internal Audit Function
Requirement
• The code must provide for an enforcement mechanism
and a fair process to determine violations
• Each listed company is required to promptly disclose
any waivers of the code of conduct
N/A
Related Party Transaction
7
• The NYSE may issue public reprimand letters to listed
companies violating a NYSE listing standard
• The CEO is required to provide the NYSE with prompt
notice after any executive officer of the listed company
becomes aware of any material non-compliance with any
applicable provisions of the new NYSE rules
• The CEO of each listed company is required to certify
that he or she is not aware of any violation by the
company of the NYSE’s corporate governance standards
listing standards (which would be required to be disclosed
in the listed company’s annual report or annual report on
Form 10-K filed with the Commission)
• Each listed company is required to conduct a review of
related party transactions for conflicts of interest and to
obtain approval of such transactions from the audit
committee or other committees of independent directors
• Each listed company that receives an audit opinion that
contains a “going concern” qualification must disclose
receipt of the qualification through the news media within
seven calendar days following the filing of the audit opinion
in a public filing with the Commission
• The listed company is required to provide Nasdaq with
prompt notification after an executive officer becomes
aware of any material non-compliance with Nasdaq Rule
4350
• The code shall be included on listed company’s website • Any waivers of the code for directors or executive officers
must be approved by the board and disclosed in a Form 8K within five days
Nasdaq
NYSE
Public Announcements
CEO Certification
Requirement