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Summary
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 NYSE
and Nasdaq rules require that listed companies
- Have boards with a majority of independent
directors, and
- Specified committees have only independent
directors
SEC
Rule 10A-3(b)(1)
- Imposes
additional independence requirements
on audit committee members
- Implemented through NYSE / Nasdaq rules
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Developments
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Nasdaq
proposes to change definition of
independent director
- Would amend Rules 4200(a)(15), IM-4200 and 4350
- Changes would narrow differences
between Nasdaq and NYSE rules
Nasdaq
proposes to change its cure period
- Would add a minimum cure period of 180 days
from time company loses an independent director
or audit committee member
- Nasdaq rule currently requires a cure by the
earlier of
- next annual shareholders meeting, or
- one year from the event that caused the deficiency
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NYSE Substantive Requirement NYSE
303A.01
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Text of Rule
Listed
companies must have a majority of
independent directors
 Does
not apply to
Archive
- Listed
companies had until their next annual meeting after 1.15.04,
but no later than 10.31.04, to comply
- Longer periods apply for classified boards
and IPO issuers
- SEC
approval order
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NYSE Definition of Independent NYSE 303A.02
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Text of Rule No
director is independent unless
company's board determines there
is
no material relationship with company
- Must be disclosed in proxy statement
- Categorical standards may be used to make determinations
- Exceptions from categorical standards
must be disclosed
- Significant stock ownership does not
preclude independence
- Current employment by the company
precludes independence
Following
relationships preclude independence
for three years
 More
than $100,000 per year in direct compensation
from the company
- Excluding director
and committee fees
- Excluding for service as an interim
Chairman or CEO
- Excluding pensions and other vested
deferred compensation
- Covers
immediate family members
Similar to Nasdaq's $60,000 standard
Affiliation
with the company's auditors
- Covers
immediate family members,
if employed in a professional capacity
Being
an executive at another company where a company executive serves on the
compensation committee
- Also applies
if a family member is the executive officer
(but not an employee)
Being
an executive officer or employee of another company that exceeds a 2% / $1
million gross revenue threshold
- Also applies if family member is an executive officer
(but not an employee)
Similar to NASDAQ's 5% / $200,000 standard
Immediate
family memberincludes spouse, parents, children, siblings,
in-laws, others sharing home
- Broader than the SEC definition for
audit committee independence
- Compare
Nasdaq definition (doesn't include
in-laws)
Three-year
period is phased-in
- Commencing
11.04.03
- Effective date
of 303A(2)
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Nasdaq Substantive Requirement Rule 4350(c)(1)
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Text of Rule
Must have a majority of
independent directors
- Must disclose their identities in proxy
- Rule has procedure to cure one vacancy
or
one director ceasing to be independent
Specified
matters must be dealt with by either
- A majority of independent directors, or
by
- Nominating, compensation
or audit committee
Archive
SEC_CODE_REF_0090001192884
- Listed
companies hade until their next annual meeting after 1.15.04 - but no later than
10.31.04 - to comply
- Longer periods apply for classified boards
and IPO issuers
- SEC
approval order
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Nasdaq Definition of Independent Director
Rule 4200(a)(15)
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Text of Rule
Board
to make an affirmative determination
as to independence
- Stock
ownership alone doesn't preclude independence
Following relationships preclude
independence
for three years
- Employment by the company
- But only for family members who are executive
officers
- Receipt of payments in any fiscal year in excess of $60,000
- Other than for board service
- Other specified exceptions
- Being
a partner, controlling shareholder or executive officer of an organization
that gets/gives in excess of a 5% / $200,000 revenue threshold
- Interlocking
directorship involving a compensation committee
- Affiliation with the company's auditors
Definition
of "Family Member"
- Spouse, parents, children and siblings,
whether by blood, marriage or adoption
- Or anyone residing in such persons home
- Compare
NYSE definition which also includes in-laws
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Additional Audit Committee Requirements
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SEC Rule 10A-3(b)(1) Requires
that audit committee members
meet a heightened standard for independence
- Implemented through SRO listing requirements
Two
additional independence criteria
Cannot
accept any consulting, advisory or other compensatory fee
- Whether direct or indirect
- Excludes board and committee fees
- Covers issuer's affiliates
- Includes spouses; children or
stepchildren who are minors or living in home
- Covers partners and principals of
advisory firms
(accounting, consulting, legal, banking, etc.)
Cannot be an
affiliated person of
the issuer
or its subsidiaries
- Defined by reference to existing Exchange Act
definitions
- With safe harbor, if not an executive officer, director or 10% shareholder
◊ Rule 10A-3(e)
- Exemption for service on board of an
affiliate
◊
Rule 10A-3(b)(1)(iv)(B)
- Exemption for all but one director for
90 days following IPO
◊
Rule 10A-3(b)(1)(iv)(A)
- Special provision for dual holding companies
- SEC notes that SROs may adopt rules stricter than SOX Act mandate, precluding other types of business and personal relationships
Applies
to
Foreign
private issuers, with exemption for
- A non-management employee representative --
10A-3(b)(1)(iv)(C)
- A non-voting representative of a controlling
stockholder -- 10A-3(b)(1)(iv)(D)
- A foreign government representative --
10A-3(b)(1)(iv)(E)
- Alternative structures for auditor oversight
- Different
rules for investment companies -- 10A-3(b)(1)(iii)
- Applies
to small business issuers, if listed
- Doesn't
apply to asset-backed issuers
Rule
10A-3(b)(1)(iv)(F) - SEC authority for case-by-case exemptions
- SEC believes that further exemptions will
generally not be appropriate
- Including for foreign issuers
Required
disclosures in annual reports / proxy statements
- Identity of audit committee members
- Updates to prior disclosures
- Any reliance on an exemption
Adopted
per SOX Act § 301 (Exchange Act §10A(m)(3))
NYSE Rule 303A(6)
- Text of rule
- References
- and conforms to - Rule 10A-3
- Original proposal had NYSE-specific
requirements
- These were deleted, except for
"financial expertise" requirement which is now included in NYSE
303A(7)(a)
Nasdaq Rule 4350(d)(2)
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Sample Corporate Practices
Sample Disclosures
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GM
director resigns over conflict as a GE director
-
GM Form 8-K
4.18.05
- Because of GM:GE competition in
financial services;
Provisions of Clayton Antitrust Act relative to
interlocking
directors
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Commentary
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Law
firm mailings
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Related Topics
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